The IMF's dreary report card

Thursday

Jul 11, 2013 at 1:50 PMJul 11, 2013 at 1:55 PM

Robert J. Samuelson - Economic Commentary

The International Monetary Fund's latest global economic forecast makes for unhappy reading. You may remember that, some years back, it was fashionable to ask whether the world economy could continue "flying on one engine" -- meaning the United States.

America's boom and import appetite boosted other economies. After the U.S. crash in 2008, the role of global engine shifted to the so-called BRIC countries (Brazil, Russia, India and China) and other "emerging market" nations. Their strong growth offset some weakness in America, Europe and Japan. The new world helped rescue the old.

Well, you can forget that. There is no engine anymore.

The IMF report confirms what's been increasingly obvious: Many emerging-market countries -- led by China -- have stumbled. By our lights, their growth rates remain high because they have huge labor forces and haven't exploited all existing technologies. But the declines are sizable and could get worse. From 2005 to 2011, China's annual growth averaged almost 11 percent; in 2013, the IMF expects 7.8 percent. For India, the IMF forecasts 5.6 percent this year, down from a 2005-11 average of 8.4 percent. Brazil has also decelerated.

Ironically, the major economy that looks the strongest is the United States'. True, the U.S. isn't robust. But compared with slowdowns elsewhere, it doesn't look so bad. The American recovery has continued for four years and, if anything, may strengthen in 2014 (growth up to 2.7 percent from 1.7 percent in 2013). By contrast, the eurozone -- the 17 countries using the euro -- is in its second year of recession, and now the BRICs are faltering.

In a healthy global economy, countries' growth is mutually reinforcing. International trade and investment expand. But the process can also work in reverse. Sluggish growth and slumps feed on each other. China's slowdown lowers its demand for basic commodities (iron ore, soybeans, copper), which hurts Latin American and African suppliers. Europe's recession weakens the United States and China, which are big exporters to Europe. And so on.

Whether this gets worse is unclear. But the outlook has darkened recently, as Olivier Blanchard, the IMF's chief economist, noted at a news briefing. "Growth almost everywhere," he said, "is a bit weaker than we forecast last April" -- and that forecast itself was weak. In 2013, the IMF expects the world economy to grow 3.1 percent, the same as in 2012 and down from an April forecast of 3.3 percent. More relevant: the forecast is much lower than the actual average growth of 4.6 percent achieved in 2010 and 2011.

For 2014, global growth is predicted to rebound to 3.8 percent, but this could be a triumph of hope over experience. Even the IMF concedes that "downside risks ... still dominate." One problem is that some emerging-market countries relied on policies that provided artificial and temporary stimulus. These now need replacing.

Consider China. Its growth has depended heavily on credit-financed investment in factories and housing. As a share of the economy (gross domestic product), investment rose from 39 percent before the financial crisis to 45 percent now, noted Blanchard. There's a widespread view that much of this investment is premature or unneeded. So, he said, China faces a dilemma: continue promoting investment and risk more unproductive projects and loan losses; or tighten credit and slow the economy, because higher consumer spending won't fully offset lower investment. There's no easy way out.

India grapples with a similar situation. Growth flowed from expansive budgets and loose money policies that are unsustainable, writes economist Arvind Subramanian of the Peterson Institute. These policies left a legacy of "high fiscal deficits, close to double-digit inflation and high [trade] deficits." Again, no easy way out.

Europe, the United States and Japan also face unsavory choices. All wrestle with what the IMF calls "fiscal consolidation" -- reducing budget deficits. The underlying problem: costly welfare states with aging populations. Spending must be cut or taxes raised. Both may depress the economy, but if nothing is done, higher debt levels may ultimately cause higher interest rates. Though the decisions are domestic, the repercussions may be global, because these advanced nations represent roughly 40 percent of the world economy.

The bad news is that the bad news may be infectious. Blanchard said he detects in France and Germany "a general lack of confidence in the future, which, if it doesn't turn around, ... may end up being partly self-fulfilling." It's not just France and Germany.

Robert Samuelson is a columnist for the Washington Post Writers Group. His column and weekly blog also appear online at telegram.com.

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